No Risk vs. Know Risk

Uncertainty in capital markets has made some firms (and boards) opt to forbid investing any of their precious cash in securities that have credit risk. Even fixed-income issuers and money funds with well-understood and transparent risk profiles, both before and after the credit crisis, have been categorized by some as unacceptable or “unknowable” risks as a result. With government money funds, short-term treasury and government-backed agencies perilously close to zero yield now and in the near future, the time has come to reassess that approach.

Principal loss or frozen investments caused by a corporate asset manager’s decisions should always be a termination-worthy offense. But, income lost by foregoing investment in credits that can be confidently measured by a professional asset manager and the investing firm is ultimately the same as principal lost.

Instead of saying "no risk," we argue that the better approach going forward is to actually know your risk.

Uncertainty in capital markets has made some firms (and boards) opt to forbid investing any of their precious cash in securities that have credit risk. Even fixed-income issuers and money funds with well-understood and transparent risk profiles, both before and after the credit crisis, have been categorized by some as unacceptable or “unknowable” risks as a result. With government money funds, short-term treasury and government-backed agencies perilously close to zero yield now and in the near future, the time has come to reassess that approach.

Principal loss or frozen investments caused by a corporate asset manager’s decisions should always be a termination-worthy offense. But, income lost by foregoing investment in credits that can be confidently measured by a professional asset manager and the investing firm is ultimately the same as principal lost.

Instead of saying "no risk," we argue that the better approach going forward is to actually know your risk.